National Insurance For The Self Employed

2016/17 update – past, present and future

National Insurance was first introduced in the UK in 1911 as a contribution to certain state benefits provided for illness and unemployment.

This was later expanded to include a contribution to the state pension and the National Health Service. These funds collected were traditionally ring-fenced for the above services only, however governments in more recent times have borrowed from this fund and as such there is no longer a clear distinction.

Most people in the UK contribute national insurance via employment income – this is called Class 1 national insurance and there is both an employee element and a contribution also paid by the employer. This is dealt with via payroll and the PAYE system.

For the self employed, national insurance is taken slightly differently via two forms of contribution – Class 2 & Class 4.

self employed national insurance 2016-17

Class 4 national insurance is paid at the appropriate rate according to your level of self employed profits. Once your profits in any given tax year breach the lower profits limit (£8,060 for the 2016-17 tax year) you pay at a rate of 9% on profits made. Once profits go past £43,000, contributions reduce to 2% of profits made over and above this figure.

Class 4 National Insurance is paid as part of the tax return system, as such amounts owed are paid by the 31st January following the end of the tax year in question with further amounts paid by the subsequent 31st July should you be liable to payments on account.

Class 2 is a flat rate form of national insurance which is currently paid at £2.80 per week (£145.60 per year). You can claim an exemption from paying class 2 should your business profits be below £5,965 in the 2016-17 tax year.

Example calculation:

Steve is a self employed graphic designer and for the 2016/17 tax year his only source of income is his self employment. His taxable profits are £35,000.

Class 2 NI – his profits are above the £5,965 threshold so he will have to pay a fixed amount of £145.60

Class 4 NI – his £35,000 profits are above the threshold of £8,060 by £26,940, 9% x £26,940 = Class 4 NI of £2,424.60

In the recent past the self employed individual would pay their Class 2 NI outside of the tax return system – receiving details of amounts owing to HMRC and they would pay these on a periodic basis,  usually six monthly upon receipt of their Class 2 NI statement or by monthly direct debit.

Part way through the 2015-16 tax year the system of collection changed more in line with that of Class 4 National Insurance – through the tax return system.

This transitional tax year has led to many self-employed individuals paying a proportion of their Class 2 liability via the old system with the remainder to be paid with the rest of their tax and national insurance liability by 31st January 2017, an adjustment will need to be factored in on the personal tax return.

In the last budget the chancellor announced that there are plans to abolish Class 2 National Insurance completely from 2018, this will be done in conjunction with a reform of Class 4 National Insurance to produce a single amount of National Insurance paid by the self-employed.

Although it is too early to know the details of this, we welcome this proposed simplification of the national insurance system for the self employed.